Wendy's boss wants to use straight-line depreciation for the new expansion project because he said it will give higher net income in earlier years and give him a larger bonus. The project will last 4 years and requires $1,780,000 of equipment. The company could use either straight-line or the 3-year MACRS accelerated method. Under straight-line depreciation, the cost of the equipment would be depreciated evenly over its 4-year life. (Ignore the half-year convention for the straight-line method.) The applicable MACRS depreciation rates are 33.33%, 44.45%, 14.81%, and 7.41%. The project cost of capital is 9%, and its tax rate is 25%. a. What would the depreciation expense be each year under each method? Enter your answers as positive values. Do not round intermediate calculations. Round your answers to the nearest dollar. Year 1 Scenario 1 (Straight Line) $ 2 $ 3 $ 4 $ b. Which depreciation method would produce the higher NPV, and how much higher would it be? Do not round intermediate calculations. Round your answer to the nearest cent. The NPV under -Select- ✓will be higher by $ $ Scenario 2 (MACRS) $ $
Wendy's boss wants to use straight-line depreciation for the new expansion project because he said it will give higher net income in earlier years and give him a larger bonus. The project will last 4 years and requires $1,780,000 of equipment. The company could use either straight-line or the 3-year MACRS accelerated method. Under straight-line depreciation, the cost of the equipment would be depreciated evenly over its 4-year life. (Ignore the half-year convention for the straight-line method.) The applicable MACRS depreciation rates are 33.33%, 44.45%, 14.81%, and 7.41%. The project cost of capital is 9%, and its tax rate is 25%. a. What would the depreciation expense be each year under each method? Enter your answers as positive values. Do not round intermediate calculations. Round your answers to the nearest dollar. Year 1 Scenario 1 (Straight Line) $ 2 $ 3 $ 4 $ b. Which depreciation method would produce the higher NPV, and how much higher would it be? Do not round intermediate calculations. Round your answer to the nearest cent. The NPV under -Select- ✓will be higher by $ $ Scenario 2 (MACRS) $ $
Financial Management: Theory & Practice
16th Edition
ISBN:9781337909730
Author:Brigham
Publisher:Brigham
Chapter11: Cash Flow Estimation And Risk Analysis
Section: Chapter Questions
Problem 5P: Wendys boss wants to use straight-line depreciation for the new expansion project because he said it...
Related questions
Question
![Depreciation Methods
Wendy's boss wants to use straight-line depreciation for the new expansion project because he said it will give
higher net income in earlier years and give him a larger bonus. The project will last 4 years and requires
$1,780,000 of equipment. The company could use either straight-line or the 3-year MACRS accelerated method.
Under straight-line depreciation, the cost of the equipment would be depreciated evenly over its 4-year life. (Ignore
the half-year convention for the straight-line method.) The applicable MACRS depreciation rates are 33.33%,
44.45%, 14.81%, and 7.41%. The project cost of capital is 9%, and its tax rate is 25%.
a. What would the depreciation expense be each year under each method? Enter your answers as positive values.
Do not round intermediate calculations. Round your answers to the nearest dollar.
Year
1
2
Scenario 1
(Straight Line)
3
$
$
$
$
$
$
4
$
$
b. Which depreciation method would produce the higher NPV, and how much higher would it be? Do not round
intermediate calculations. Round your answer to the nearest cent.
The NPV under [-Select-
will be higher by $
Scenario 2
(MACRS)](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2F183f1dfd-a135-4e08-8248-50e8b6cef1c8%2F893e9425-24c3-4c50-aea1-e19adc61139f%2F1c4pf4_processed.png&w=3840&q=75)
Transcribed Image Text:Depreciation Methods
Wendy's boss wants to use straight-line depreciation for the new expansion project because he said it will give
higher net income in earlier years and give him a larger bonus. The project will last 4 years and requires
$1,780,000 of equipment. The company could use either straight-line or the 3-year MACRS accelerated method.
Under straight-line depreciation, the cost of the equipment would be depreciated evenly over its 4-year life. (Ignore
the half-year convention for the straight-line method.) The applicable MACRS depreciation rates are 33.33%,
44.45%, 14.81%, and 7.41%. The project cost of capital is 9%, and its tax rate is 25%.
a. What would the depreciation expense be each year under each method? Enter your answers as positive values.
Do not round intermediate calculations. Round your answers to the nearest dollar.
Year
1
2
Scenario 1
(Straight Line)
3
$
$
$
$
$
$
4
$
$
b. Which depreciation method would produce the higher NPV, and how much higher would it be? Do not round
intermediate calculations. Round your answer to the nearest cent.
The NPV under [-Select-
will be higher by $
Scenario 2
(MACRS)
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